India Weighs Domestic Carbon Tax to Offset EU Border Levy

A new study suggests India can cushion the economic hit from the European Union’s Carbon Border Adjustment Mechanism (CBAM) by imposing its own carbon tax and retaining the revenue. The CBAM, set to take effect in 2026, will target carbon-intensive imports such as iron and steel, cement, aluminum and fertilizers from countries with weaker climate policies.

The iron and steel sector is most exposed, accounting for nearly 90% of India’s CBAM-covered exports. Without a domestic levy, India risks losing tariff revenues to Brussels, with GDP shrinking slightly as a result. High logistics costs and competition from low-priced imports already strain the sector, the study notes.

Researchers modeled scenarios showing that a domestic carbon tax could generate revenues of up to 1% of GDP by 2030, enabling green subsidies, industrial support and household compensation. This “revenue recycling” would ease economic pain, support renewable energy growth and limit declines in fossil-fuel-based industries.

The report concludes that with the right policies-such as a carbon trading scheme, targeted support for vulnerable sectors, and diversification of exports-India could turn CBAM into a catalyst for its net zero transition. Instead of being a burden, the mechanism could accelerate investment in clean technologies and strengthen India’s position in global trade.

Domestic carbon-tax revenue recycling would allow India to capture revenue that would otherwise flow to EU CBAM collectors. Iron and steel accounting for nearly 90 percent of India's CBAM-covered exports concentrates the exposure - a well-designed domestic mechanism could redirect that revenue into transition-support investment while maintaining trade competitiveness.

The revenue-recycling approach - up to 1 percent of GDP by 2030 supporting green subsidies, industrial support and household compensation - provides the political architecture for making domestic carbon-pricing acceptable. Distribution mechanisms that channel revenue back to affected constituencies reduce the political friction that has historically slowed carbon-tax adoption in developing economies.

For steel producers, other CBAM-exposed manufacturers, financial institutions and their trade and policy advisors, Cognitud's climate action, market intelligence and sustainability due diligence teams help clients evaluate exposure to domestic-carbon-pricing scenarios, structure compliance and pass-through strategies aligned with evolving pricing frameworks, and prepare disclosures aligned with BRSR, ISSB and jurisdictional carbon-pricing frameworks that increasingly determine competitive positioning across international trade routes.